Although life insurance usually isn’t top of mind in retirement, you may want to consider how your permanent life insurance policy can provide another valuable source of income in this stage of life.
Diversifying your retirement strategy
Permanent life insurance creates another asset class in your retirement strategy, outside of your traditional retirement vehicles, like 401(k) s and IRAs. And, this asset class can be a ready source of retirement income. In simple terms, you can access the cash value from your permanent life insurance policy on an income tax-preferred basis to use during market downturns that may negatively impact your market-based sources of retirement income.1
Financial professionals know that permanent life insurance serves as a diversified retirement income source. Using a policy’s cash value when the market is down protects you from liquidating assets that are exposed to market risk. Having this alternative income source prevents you from locking in a loss to generate necessary income, an approach that will increase your risk of running out of money sooner than your retirement calculators say you might.
The Great Recession (and 2022’s down market) has shown us what can happen to even the best planned retirement. Whole life insurance in particular can have a tremendous positive impact. With its guaranteed, steady growth, your cash value can be used to minimize your exposure to market downturns in retirement by allowing your market-based assets time to recover. Having that cash value can help you maintain your pre-retirement standard of living and retire when and how you want to.
And, not to be overlooked, having life insurance in retirement can provide a substantial legacy for your children or grandchildren. An inheritance can help your children or grandchildren pay off college debt, or their mortgage.
Facing inflation and longevity
Owning life insurance in retirement has other advantages that address typical retiree concerns. For instance, inflation. In today’s economy, the long-term growth of a whole life policy’s cash value typically outpaces other low-risk savings vehicles, like money market funds and CDs. This enables a conservative component of your retirement strategy to stay ahead of inflation.
Another big advantage of whole life insurance in retirement is that it can help reduce the risk that you’ll outlive your money. The appreciating cash value gives you the flexibility to be more conservative or more aggressive with the rest of your market-based retirement assets, depending on your situation, providing additional flexibility to your retirement.
It’s never too early or too late to get started. Of course, purchasing life insurance at a young age will be less expensive than it would be the longer you wait. And, getting started early allows you to accumulate more cash value throughout your life. That’s because there’s no limit to what you can contribute to a life insurance policy, unlike the contribution limitations in a qualified retirement plan, such as a 401(k) or IRA.
Even older pre-retirees can get started with a whole life policy. You won’t have access to the cash value immediately, but you can access money from your investment accounts first, then tap into your cash value later in retirement.
I’ve found that many people are not aware of the benefits of life insurance in retirement because considering it as an income generating asset is not top of mind when they are creating their strategy. But now you know differently.
Retirement shouldn’t be a financial burden. When structured and used properly, permanent life insurance, specifically whole life, can supplement your retirement income and be the means by which your retirement becomes an exciting new chapter of your life.
Talk to a financial professional
To learn how life insurance might provide advantages you haven’t considered, contact your financial professional.
1Accessing cash value will reduce your policy death benefit and values, may result in certain fees and charges and may require additional premium payments to maintain coverage. Loans and other policy withdrawals may be taxable under certain circumstances. Ask your financial professional for details on accessing your cash value, including how it might impact the coverage guarantees and situations when the values you access could be taxable. Always consult your tax advisor before accessing a policy’s cash value or taking a loan from a policy.
The information in this material is for informational purposes only and is not intended as financial, tax or legal advice. Reference to the taxation of products in this material is based on Penn Mutual’s understanding of current tax laws. All guarantees are subject to the claims paying ability of the insurer. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for your personal situation. Always consult your financial, legal or tax professionals.